Credit Opinion: CNPC Captive Insurance Company Limited

Transcription

1 Credit Opinion: CNPC Captive Insurance Company Limited Global Credit Research - 29 Jul 2015 China Ratings Category Rating Outlook Insurance Financial Strength China National Petroleum Corporation Rating Outlook LT Issuer Rating Moody's Rating STA A1 STA Aa3 Contacts Analyst Phone Stella Ng/Hong Kong Sally Yim/Hong Kong Stephen Long/Hong Kong Key Indicators CNPC Captive Insurance Company Limited[1][2] As Reported (Chinese Renminbi Millions) Total Assets 8,698 5, Total Shareholder's Equity 5,172 4, Net income (loss) attributable to common shareholders 173 (1) Gross Premiums Written Net Premiums Written Moody's Adjusted Ratios High Risk Assets % Shareholder's Equity 0.0% 0.0% Reinsurance Recoverable % Shareholder's Equity 1.3% 0.0% Goodwill & Intangibles % Shareholder's Equity Gross Underwriting Leverage 0.1x NA Return on avg. Capital (1 yr. avg ROC) 3.3% NA Sharpe Ratio of ROC (5 yr. avg) NA NA Adv./(Fav.) Loss Dev. % Beg. Reserves (1 yr. avg) NA NA Financial Leverage Total Leverage Earnings Coverage (1 yr.) Cash Flow Coverage (1 yr.) [1] Information based on Local GAAP and financial statements as of Fiscal YE December 31 [2] Certain items may have been relabeled and/or reclassified for global consistency Opinion SUMMARY RATING RATIONALE CNPC Captive Insurance Company Limited`s (CNPC Captive Insurance) A1 insurance financial strength (IFS)

2 rating primarily reflects its highly correlated credit profile with that of China National Petroleum Corporation (CNPC, issuer rating Aa3 stable), and its integration with the CNPC group. CNPC is the largest oil & gas company in China, and is wholly owned by the Chinese government (Aa3 stable). CNPC is also one of the largest state-owned enterprises directly supervised by the central State-owned Assets Supervision and Administration Commission of the State Council. PetroChina Company Limited (PetroChina, unrated) is the main operating arm of CNPC, which is 86.35%-owned by CNPC. It is listed in Hong Kong, Shanghai and New York. CNPC Captive Insurance is 51%-owned by CNPC, and 49%-owned by PetroChina. We view the insurer's rating as being underpinned by its close linkage with CNPC and PetroChina, reflecting its integration with the risk management function of the group. We expect that its parents would provide timely support to CNPC Captive Insurance. Our assessment of support also incorporates expectations of the regulator, the China Insurance Regulatory Commission that a parent company should always ensure its captive insurance subsidiary maintains adequate levels of capital. Parent companies are required to inject capital into their captive insurance subsidiary whenever such a subsidiary fails to meet the regulatory solvency requirement. CNPC Captive Insurance recorded net profits of RMB173.4 million in 2014, despite its unfavorable underwriting results, which was mainly attributable to strong investment earnings. The company's investment portfolio is highly liquid; its cash and bank deposits represented 85% of its total assets at 30 June 2015 (88% at end-2014). The one-notch difference between the ratings of CNPC and CNPC Captive Insurance reflects the modest standalone credit profile of the subsidiary, and the lack of explicit guarantee from the parent. As a start-up insurer, CNPC Captive Insurance lacks a track record of underwriting performance. Moreover, the insurer's strengths are partially offset by its limited external reinsurance protection in place for claims, and its focus on property risk in the oil & gas sector, an industry which is intrinsically volatile. Credit Strengths - Expected high levels of operational and financial support from CNPC - Integration of CNPC Captive Insurance with CNPC group's resources and risk management activities - Liquid investment portfolio, comprising mainly cash and deposits Credit Challenges - As start-up, CNPC Captive Insurance lacks a track record of underwriting performance - High credit correlation with CNPC's business growth, and with affiliates within the group - Low product diversification, with a focus mainly on property damage and marine risks for the oil & gas sector. The lack of product diversification could lead to intrinsic volatile earnings. Rating Outlook The rating outlook for CNPC Captive Insurance is stable. What to Watch For: - Continued strong support from CNPC - Stable and profitable underwriting performance, as CNPC Captive Insurance's business grows - Credit rating of parent company, CNPC. What Could Change the Rating - Up Given that CNPC Captive Insurance's credit profile is highly correlated with that of its parent, if CNPC's rating is not upgraded, an upgrade of CNPC Captive Insurance's rating is unlikely. Nevertheless, an explicit guarantee

3 from CNPC could be an upgrade trigger. What Could Change the Rating - Down - Downgrade of CNPC's rating - Any indication of a fall in the degree of support from the CNPC group - If CNPC Captive Insurance's capital base is not replenished, following a series of significant losses due to large industrial and catastrophic events. DETAILED RATING CONSIDERATIONS The key factors currently influencing CNPC Captive Insurance's IFS rating and outlook are: MARKET POSITION, BRAND AND DISTRIBUTION: START-UP OPERATIONS CNPC Captive Insurance's market position and distribution network are limited, because of its recent establishment in late December 2013 and its status as a captive insurer which solely underwrites risks for CNPC group. The insurer's premium growth opportunities are dependent on the group's productions in both China and overseas markets. CNPC Captive Insurance's premiums grew robustly for the six-month period ended 30 June 2015 to RMB379 million, compared to RMB156 million for Being a captive insurer, this factor is not material for our overall rating assessment of the company. PRODUCT FOCUS AND DIVERSIFICATION: CAPTIVE INSURER OF PARENT'S RISKS MAINLY IN PROPERTY CNPC Captive Insurance covers both the group's domestic and overseas insurance risks, representing 86% and 14%, respectively, of the insurer's total premium income in The insurer has started taking on the group's employer liability risks in Its book of business mainly comprises three lines of business: commercial property (47% of gross premiums written as of 1H 2015), liability (26%), and specialty risks (17%). ASSET QUALITY: VERY LIQUID INVESTMENT PORTFOLIO WHICH COMPRISES MAINLY CASH AND BANK DEPOSITS CNPC Captive Insurance's investment portfolio is highly liquid. As at 30 June 2015, cash and bank deposits represented 85% of the insurer's total invested assets (88% at end-2014); the remaining 15% was mainly invested in trust plans. Its trust plans are partly covered by guarantors, accounted for 19% of shareholders' equity at end-june While these assets exhibit a higher promised yield when compared to traditional fixed-income instruments, a substantial increase in the insurer's exposure to trust products will negatively affect the credit quality of its investments, because such assets are associated with higher default risk, lower liquidity and less transparency. CAPITAL ADEQUACY: STRONG CAPITAL LEVELS, AND EXPECTED HIGH LEVEL OF SUPPORT FROM CNPC CNPC Captive Insurance's capitalization position remains strong. It has sufficient cushion to maintain minimum capital levels required by the insurance regulator. With its parents' support, the company will not expect to have shareholders' dividends repatriation through 2016 to strengthen its capital base for expected premium growth. Its gross underwriting leverage was minimal at 0.1x in Despite a strong premium growth is expected in 2015, we believe CNPC Captive Insurance's capital adequacy levels will remain strong to support its business growth. Nonetheless, the company is exposed to natural catastrophe perils, which could potentially undermine its capital strength. Because the insurer is an integral part of CNPC group's risk management process, we believe that the parent will continue to ensure that CNPC Captive Insurance maintains adequate capital levels, as the insurer's business grows.

4 While CNPC Captive Insurance has no explicit guarantee or a keepwell agreement from CNPC, the insurer's article of association states explicitly that the parent company should support the captive insurer in improving its solvency ratios, whenever the insurer fails to meet regulatory requirements. PROFITABILITY: NET INCOME REPORTED IN 2014 DESPITE UNDERWRITING LOSSES The company recorded underwriting losses in 2014 with a combined ratio of 154%. Its loss ratio was high at 89% due mainly to several large typhoon and windstorm losses during the year. We anticipate that the company's loss ratio to be volatile, due to its relatively modest size and its exposure to potentially high-severity losses, which are difficult to estimate. At the same time, its expense ratio stood high at 65% in As CNPC Captive Insurance is at its early stage of operations with no economies of scale, we expect the ratio would remain high in The company's return on capital was 3.3% in The stable and good investment income generated from its large holdings of cash and deposit offset the underwriting losses made during the year. As a result, the company reported a net income of RMB173 million in RESERVE ADEQUACY: VERY LIMITED CLAIMS EXPERIENCE We believe that CNPC Captive Insurance's reserves will remain adequate for the risks it has underwritten. The insurer relies on the regular reviews of a globally recognized audit firm to determine the adequacy of its reserve levels. Because it was only established in December 2013, its global metrics for this rating factor are not an appropriate or accurate measure of its reserve adequacy position. We also believe that this factor is affected by the insurer's exposure to high-severity losses, which could impact its reserve adequacy profile, if large events occur. FINANCIAL FLEXIBILITY: TIED CLOSELY TO PARENT'S CREDIT QUALITY AND ACCESS TO CAPITAL CNPC Captive Insurance does not have external debt on its balance sheet, and -- as a captive insurer -- does not have direct access to the capital markets or other external financing. While it lacks direct capital market access, we believe CNPC Captive Insurance benefits from its parent's financial flexibility, both in terms of capital resources and liquidity. It also has access -- through its parent -- to both equity and debt financing. We expect that while its primary source of future capital is its retained earnings, its parent will provide additional capital when needed. Other Considerations Implicit/Explicit Support CNPC Captive Insurance's rating benefits extensively from the ownership and implicit support received from CNPC. For example, the insurer's risk management processes are integrated with that of the group, the group's control and oversight over its captive insurer, and the parent has provided significant initial capital, thereby enabling CNPC Captive Insurance to maintain a solid capital base to support its operations and risk exposures. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES,

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